making_sense_of_the_mutual_fund_scandal (1)

making_sense_of_the_mutual_fund_scandal (1) - 1/22/2011...

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Search Fortune Enter quotes RSS Newsletters Video Home Fortune 500 Technology Investing Management Rankings More from Fortune 2011 buzzword alert: Rebalancing Is Google really interested in ridding its results of spam? Immelt joins Obama's kitchen-CEO cabinet FORTUNE 500 Current Issue Subscribe to Fortune Making Sense of the Mutual Fund Scandal Everything you may not want to ask (but really should know) about the crisis that's rocking the investment world. By Janice Revell; David Stires November 24, 2003 (FORTUNE Magazine) – The mutual fund business has long portrayed itself as a model citizen in the sometimes seamy world of financial markets. But the avalanche of allegations charging abusive behavior in the $7 trillion industry over the past few months has been enough to shake any investor's faith. Congressional hearings in early November painted a picture of a business awash in conflicts of interest and self-dealing, where insiders profit at the expense of ordinary investors--"the world's largest skimming operation," as one Senator put it. What is in danger of getting lost in the almost daily drumbeat of subpoenas and executive resignations, however, are the consequences for the nation's 95 million fund investors. Since the scandals center on practices--like unsanctioned market timing and late trading--that are typically the province of insiders, their effect on the average investor is not always obvious to the untrained eye. To make sure you have enough information to navigate this scandal, we provide answers to frequently asked questions and advice on how to get through unscathed. How did the scandal get started? The crisis erupted in September, when New York attorney general Eliot Spitzer alleged that four mutual fund companies had struck illicit relationships with Canary Capital Partners, a New Jersey hedge fund. Spitzer charged that Bank of America's fund business allowed Canary to trade several funds after the markets had already closed at that day's prices. Known as "late trading," this illegal practice allowed Canary to trade on after-hours news (such as earnings announcements) at before-closing prices. Spitzer also charged that Banc One, Janus, and Strong (see "Up Against the Wall") allowed Canary to quickly jump in and out of their mutual funds to make a fast profit, a practice known as "market timing." While market timing is not illegal per se, fund companies can violate securities law if they state in their fund prospectuses that they discourage market timing but then make exceptions for "select" investors or their own employees. How does market timing work? Market timing is especially common in international funds, where investors attempt to exploit price discrepancies in a fund's net asset value due to time-zone differences. Say there's a big selloff on Monday morning in the Japanese stock market. Hours later, after the Japanese market has closed, U.S. stocks rally heavily in New York. Market timers, assuming there's a high likelihood that stocks in
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This note was uploaded on 02/17/2012 for the course FIN 4504 taught by Professor Banko during the Spring '08 term at University of Florida.

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making_sense_of_the_mutual_fund_scandal (1) - 1/22/2011...

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